With the results of the ECB strategy review now published, the commitment of the ECB to tackle climate change is officially on paper. While it is a step in the right direction, disclosures, as largely planned by the ECB, in themselves do not constitute significant actions towards tackling climate change. Combined with the slow speed of implementation, we doubt the ambition of the climate roadmap.
On July 8th, the ECB published the outcomes of its second ever strategy review, thus wrapping up the process that took 18 months. Undeniably, it constitutes a paradigm shift in regards to its consideration of climate change, and most importantly a commitment to look into alternative benchmarks than the current market neutrality. Until the publication of the roadmap, the concrete actions of the ECB on climate constituted the occasional purchase of green bonds and sustainability-related bonds, in negligible amounts compared to the other monetary policy operations.
However, the roadmap as it stands is too narrow in focus, with concrete actions coming at too delayed a time and too unambitious on certain points. Given the fact that the next decade will play a critical role in reversing the effects of climate change, waiting until 2025 for concrete actions is a luxury of time that we simply cannot afford.
The announced measures regarding the Asset Purchase Programme (APP) and collateral framework largely focus on two concrete operations: the Corporate Sector Purchase Programme (CSPP) and the development of a Eurosystem-own credit risk assessment framework that integrates climate risk into a wider collateral framework.
Beyond the CSPP, however, the action plan does not mention a strategy for greening other APPs, such as the Covered Bonds Purchase Programme (CBPP) and Asset-Backed Securities Purchase Programme – the latter of which includes a significant amount of auto loans. Even though they are small in size compared to the CSPP, continuing with ‘business as usual’ only increases the environmental footprint.
Crucially, the roadmap does not mention how to green the ECB’s Targeted Longer-Term Refinancing Operations (TLTROs).
Through TLTROs banks borrow at a negative rate as low as -1.0% from the ECB. Effectively, it is a subsidy for banks, without any climate and environmental concerns. Since the onset of the pandemic, banks have borrowed almost €2 trillion and there are two more operations scheduled until the end of 2021.
Given its sheer size, the environmental impact of TLTROs cannot be ignored until the next strategy review in 2025. A proposal for greening the TLTROs was already put forward by Positive Money Europe and Sustainable Finance Lab (van ‘t Klooster and van Tilburg, 2020).
Positive Money Europe further explored the potential of green TLTROs as a pilot programme aimed at targeting loans for energy-efficient building renovation purposes. We think it is entirely possible to start the pilot programme at once.
Perhaps the only impactful action envisaged is making the CSPP portfolio more sustainable. But this will only happen by 2023, meaning that billions will continue to pour into polluting companies throughout 2021 and 2022.
The ECB plans to conduct its own analysis of the CSPP portfolio – in mid-2022 only. While the Bank of England and Dutch National Bank already published the carbon footprint of their operations, the ECB can build on this experience as well as on the already existing wealth of literature analysing the carbon footprint of the CSPP. 
Even better yet, without waiting for analysis and disclosure, the ECB, based on the existing research, can already take active steps now. These include barring the most polluting corporates from the portfolio and faster disclosure of the carbon footprint of the programme, where advanced data is available already for large corporates.
Moreover, to make policy decisions more accessible to the public – one of President Lagarde’s key priorities during the review – the ECB should open up a public consultation on the CSPP. The Bank of England showed how this could be done with its Corporate Bond Purchase Scheme.
In terms of climate stress tests, the ECB has already conducted preliminary stress tests in 2021 and it will finalize economy-wide stress tests for banks the same year, which will inform larger supervisory tests for banks (based on their reported data) in 2022. While these are good starting points, introducing regular tests from 2023 onwards is clearly too delayed because it will push back much needed concrete actions that require the stress-tests data.
Such a delay is in contradiction with the ECB’s own conclusion that “there are clear benefits in acting early” and that the cost of inaction arising from climate change increases substantially over time.
All in all, disclosures do not constitute impactful actions, rather actions are built on the data and methodology at hand. The greening of the APP and the collateral framework, thus will take at least until 2024 and beyond according to the roadmap.
The roadmap puts forward an action point whereby it will look into integrating climate risk into the internal credit ratings. However, instead of the “minimum standards” that the ECB proposes, a more ambitious harmonized approach will be needed.
Credit assessment is a gateway to the collateral framework. The ECB has the power to proactively change it by introducing climate risk assessment in its credit risk assessment now. Currently, the Eurosystem Credit Assessment Framework (ECAF) relies on three sources: four big external credit rating agencies; eight National Central Banks (NCBs) and banks’ internal ratings.
By introducing climate risks into central bank internal ratings, it will reduce the overreliance on external rating agencies, which could be biased, prone to cyclical fluctuations in times of crises and ill-equipped to face current climate-induced challenges. And to add, their environmental risk rating is nascent and currently unregulated.
By incorporating climate and environmental risks, the Eurosystem, through its market-shaping powers, can redirect financial flows towards sustainable activities. An ambitious and harmonized internal framework sets up a powerful process that makes sure that the asset pool in the euro area is climate-aligned through the collateral framework.
Clearly, the outcomes of the climate strategy signal a shift in thinking towards the potential of monetary policy in tackling climate change. But, the current roadmap of actions is quite weak on actual actions. Even if there will be disclosures, risk accounting frameworks, data and models they do not entail actual implementation and impact, which are then envisaged for after the strategy review in 2025.
The protracted road out of pandemic-induced health and economic crisis with the undercurrent of climate and biodiversity decline reminds us that there is no option of separating economic recovery and climate change considerations.
There is only one road: a green, sustainable recovery. Acting otherwise would mean delays and half measures.
We at Positive Money Europe together with our coalition partners will continue to press ahead for impactful, speedy and ambitious actions on the ECB climate strategy.
1 The Bank of Japan announced a new green financing measure to start within 2021 and the People’s Bank of China followed with the announcement to promote green financing.
2 Monnin (2018), Volz (2017), Battiston et al. (2017), Monasterolo et al. (2018), Battiston & Monasterolo (2019), Matikainen S., Campiglio E., Zenghelis D. (2017), Jourdan and Kalinowski (2019), Greenpeace (2020), Kedward and Ryan-Collins (2021).